Time varying and dynamic models for default risk in consumer loans

Jonathan Crook and Tony Bellotti

Journal of the Royal Statistical Society Series A, 2010, vol. 173, issue 2, 283-305

Abstract: Summary. We review the incorporation of time varying variables into models of the risk of consumer default. Lenders typically have data which are of a panel format. This allows the inclusion of time varying covariates in models of account level default by including them in survival models, panel models or ‘correction factor’ models. The choice depends on the aim of the model and the assumptions that can be plausibly made. At the level of the portfolio, Merton‐type models have incorporated macroeconomic and latent variables in mixed (factor) models and Kalman filter models whereas reduced form approaches include Markov chains and stochastic intensity models. The latter models have mainly been applied to corporate defaults and considerable scope remains for application to consumer loans.

Date: 2010
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https://doi.org/10.1111/j.1467-985X.2009.00617.x

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